The Simple But Profound Secret to Long-Term Investing Success

As I was perusing through this awesome BiggerPockets blog, I read an article by Mindy Jensen called “12 Reasons You’re Poor.” I was particularly moved by an observation of hers that really struck a chord in me. In the article, Mindy mentions how she sees a lot of questions in the BP Forums asking:

Whenever I feel this way, I ask myself why I feel this way. Usually I can come up with an answer. In this case, I realized pretty quickly why questions like this bother me so much.

You see, it’s not the fact that people want to succeed in real estate. That is an awesome thing. I want to see as many people succeed as possible. This is why I’m on the blogs, in the forums, and answering questions sent to my inbox. The question I ask myself is, why are there so many people asking that same question? Having no money and no credit is basically being at an extreme disadvantage and trying to win the game anyway. It’s possible, but why on earth would you choose to do it that way? And if you are held back by things like no money or bad credit, why isn’t your goal to fix that before you start looking into investing?

Now, I want to make clear my goal is not to dissuade anyone from investing in real estate. There will never be the “perfect” time start, and I’m a huge proponent for taking advantage of whatever opportunities life brings your way. I’m here writing on this blog because I got an opportunity and chose to make the most of it. I hope everyone who reads this is encouraged to do the same.

My goal is to propose a way of doing things that will make it easier for you to invest in real estate successfully.

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The Ultimate Fighter

Since I’m often told I’m the king of analogies, I’ve got a good one relating to this topic. If you decided you wanted to get in an MMA cage match and knew you could set the fight for whenever you wanted, would you choose to fight next week before you had time to get in shape, train, build up your stamina, or actually learn how to fight?

That seems foolish, right? Wouldn’t you start training, learning, and working out right away to prepare for the day of your fight? Don’t you think you might hire a coach? Or at the very least find someone who knows how to fight to teach it to you? I mean, you have a lot to lose, right? You could get seriously hurt.

Plus, this first chance might be your only chance for a long time. If it doesn’t go well, you might be done for a while. Would you squander your opportunity because you were impatient, over-confident, and looking for the “secret” to winning? Or would you commit yourself to learning a new craft and make sure you even had an aptitude for it before jumping in the cage and taking the risk?

When an Investment Ends With a Punch to the Gut

Obviously, real estate investing is not fighting. But I’ll tell you, it feels like it sometimes. And losing your money can feel a lot like getting punched square in the gut. Losing ALL your money can have the same effect as getting knocked out. You’re out of the fight, out of the game, and forced to take your time recovering before you can get back in there again.

When I hear someone say, “How can I invest in real estate with no money and bad credit?” what I’m really hearing them say is, “How can I win a cage match with no training, no preparation, and not being in shape?”

I’m sure it’s possible. Anything is possible. The other guy might slip and fall right into your lap (like a good deal does once a blue moon), you might get away with an eye gouge or groin shot that the referee misses (like an unethical move that nobody sees to land a good deal), or you might just catch an opponent who is equally unprepared (like a seller who doesn’t know what his/her property is worth). It can happen. But it’s not likely to keep happening. And odds are, you’re likely to get knocked out long before you build any kind of a career this way.

The Importance of the Right Approach

Like Josh Dorkin always says, the people who do things unethically never have a sustained business. They get exposed, and no one will work with them. The same could be said for someone who gets in a fight at a severe disadvantage. They aren’t going to last very long that way.

So, what’s a boy or girl to do? Well, I’ll tell you — you don’t have to be in shape to start learning about combat, but you DO need to be in shape before you actually get in that ring. So, my advice for being successful in this game is to stop asking, “How can I invest in real estate with no money and bad credit?” and start asking, “How can I save more money and fix my credit?”

Now, doesn’t that make sense? Imagine you approach a trainer and say you want to prepare for a cage match. Imagine telling him you want to learn how to win without being prepared, without putting in work, and without needing to discipline yourself. What kind of trainer would ever tell you that he would take you on?

Any person worth a darn would tell you to stay far, far away from cage fighting. You are going to get hurt. You know who would agree to those terms or even advertise that they could teach people to win fights without the proper training? Rip-off artists. “Gurus.” People who want your money and don’t care if you get hurt. That’s who. These are not the people you want to be trusting, even if what they tell you is so appealing that you just want to believe it with every fiber in your being.

Pessimistic Pixie-Dusting

Have you noticed how many bitter people are wandering these forums, trolling around in the shadows and casting their pixie dust of negativity wherever they go? It’s horrible. They are like little evil Tinkerbells. They try to take those who want to fly and push them back to the ground.

How many people’s first response is to tear someone else down or call them a fool before they even understand their position? So many! Do you want to know how they become that way? They got hurt. They stepped in a fight they likely didn’t understand, and they took some abuse. They walked in that cage like a conquering lion, with all the confidence of a champion because they had made some money when the market was going up, and they believed they knew all about real estate investing.

When the market turned on them, they had no way to defend themselves, and they got knocked out. Badly. It left them bitter, angry, negative, and wounded. They recovered and ended up blaming a lot of different things for their loss. Most of them don’t blame the thing most responsible for it — their own ignorance. Had they understood how to evaluate properties, what the necessary reserves were, how their loans worked, or shoot, what cash flow actually means, they likely would have had a different result.

Don’t Get Knocked Out!

So, how can you avoid ending up as one of these terrible Tinkerbells? The answer is ridiculously simple but not very popular to accept. Stop trying to fight before you’re in shape. If you’re out of shape, you’re at a decided disadvantage. There is no reason to rush the fight other than your inability to control your own eagerness to get started. Take some time to improve your own financial situation before you get started. Take some time to fix your credit before you start looking for loans. Prove to yourself and to everyone else that you’re ready for this by mastering your own self before trying to conquer the world.

Look, this sounds simple — but I swear, this is so profound. If you cannot manage your own money, how can you manage an investment property? If you can’t manage your own bills, why should a creditor trust you to lend money to? If you have no money and bad credit, don’t you think maybe you have bigger problems to deal with than finding and managing a flip or income property? The habits you’ve formed over the years that brought you to this place are going to ruin your attempts to invest as well. If you are honest with yourself, you’ll see this makes a lot of sense.

The Weight of Success

When you begin acquiring properties, you’re not just acquiring properties. You’re also acquiring debt, responsibility, payments, and future repairs. You’re hoping for rent to offset this, but that’s never a guarantee. What is a guarantee is things will break, the bank will expect a mortgage payment, you will have vacancy, and property taxes and insurance will need to be paid. There is a weight to the responsibility of owning these properties that starts to develop. The more you acquire, the heavier it becomes.

Now, you may think you have strong legs, but my guess is maybe they have never really been tested in this way. As you begin to acquire more and more properties, that foundation you are building on is going to start to crack if it’s not as strong as you think. If you can’t manage your money or your agreement to repay debt, your foundation is going to crack. When that happens, all those homes are going to fall down and crush you.

Don’t Start a Race if You Can’t Finish It

If you are resilient, you will bounce back smarter, stronger, and more prepared. If you are not, you will end up like evil Tinkerbell, lurking in the forums and casting doubt on everyone with a dream to fly.

Why do I say this? Because I don’t want to see you start a race before you know if you can finish it. I don’t want you to start building your skyscraper before you have the foundation laid like it needs to be. Because you need to have money saved away for when expenses come — and they are going to come. If you don’t, you will lose your property. It’s that simple. You know who’s gonna buy it then? The person who has the money and the good credit. The person who was prepared when you weren’t.

The LAST thing you want is to spend all this time acquiring property, taking out loans to fix them up, getting them in shape, and then losing them to someone else who walks in and benefits from all your hard work because you didn’t have enough money set aside for emergencies. Now, this may sound too general, but I’ll tell you that if you don’t have money saved up before you buy a property, it’s not very wise to think you’ll get money saved up after you buy a property.

Learn From the Mistakes of the Past

I’m sorry if I sound like a downer right now. It’s not my intention. But if you speak to people who lost their properties, one of the few things they all have in common is that they didn’t have enough in reserves. They believed they were richer and therefore safer than they really were. And when the market shifted or they had a run of bad luck, they couldn’t sustain. It can happen to anyone, even the best ones.

Now, if it can happen to the best, wouldn’t it be wise to assume it can happen to you?

If you are one of those “gurus” trolling BiggerPockets, looking for victims to sell your wares to, beware. Karma can be a sweet puppy or a horrific dragon. It’s going to catch up to you eventually.

Real Estate’s Not a Way to Get Rich Quick

If you are one of those who is always looking for the shortcut, always looking for the fast money, always looking for “secret” that is going to bring you all the perks of wise investing without any of the work, I strongly caution you to stop where you are. Think of all the time you will waste by doing the work of acquiring a property, only to sell it to someone like me in a short sale when you can’t afford the repairs, mortgage, or taxes. Be wise. Give yourself a chance to win this fight. Take some time to conquer your inner flaws before you start trying to conquer the outer world. You will be really glad you did.

Conversely, if you are someone who has saved up a significant sum of money and who has good, solid credit, have confidence that you should pull the trigger on a deal that makes sense. The perfect deal is a fallacy. Just make solid deals and let time do its thing. You’ve already put the work in. You’ve already proven you can handle this. You have already put yourself in the position to win the fight. It’s time to put those skills to the test and get in the ring. If you’ve been sitting on the edge waiting for that push, consider this it.

Finally, if you are someone who has seen the light after reading this and you realize you need to get serious about repairing some areas of your financial life, I strongly encourage you to be transparent, reach out, and find that help. You will never regret making the decision to get serious about managing your money. Wealthy people know — managing your money is managing yourself. The better you get at doing that, the more success you will have in anything, not just real estate.

Change Your Habits to Change Your Life

I hope I didn’t offend too many people by recommending that you fix your own house before trying to take over the world. I sincerely believe that the more success you have repairing your credit and saving up money, the more success you will have when it comes to investing and managing that money. It can literally be life changing when you start tackling this stuff and facing it head on.

And once you get in that ring and stuff gets real, you will never regret the time you spent preparing for that moment.

Investors: Did you get your finances in order before you jumped into investing? Do you believe that newbies should save up and correct credit issues before investing?

Let me know your thoughts with a comment!

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About Author

David is a real estate investor/agent/author/entrepreneur/police officer in the CA SF Bay Area. David’s goal is to achieve total financial independence through real estate and to help as many others do so as possible. When not hunting bad guys, he hunts deals and loves talking real estate. To learn more about David, visit his website where you can also sign into his free investor’s newsletter and follow along as he walks you through his deals and shares his latest projects.

50 Comments

Great Article, David! Just like the Podcast where you were featured, this post resonated with me.

When you’re just getting started, like myself, sometimes there’s an internal tug o’ war going you mind. On one side you hear “take action”, “make a deal”, “the best way to learn is to just jump in and do it”. Then on the other side you hear the horror stories caused by people jumping in and making mistakes that would have been easily avoidable had they just prepared more.

There’s obviously a balance in there somewhere, and it greatly depends on a person’s individual situation as to how to proceed.

This hit post hit home for me because while income and credit is not an issue for me getting started, having reserves for when things go sideways is. I battle with whether I should try to find a flip deal where I can build some capital, or sit back and continue to prepare myself while I build some capital organically. And this post makes me lean more towards the latter.

Loved the article. I’m just a beginner investor with 2 SFR and 1 duplex and I can totally relate to this. It’s tough to know if and when you are prepared. But having a little in the bank and knowing the numbers work on a property, it was time to go for it. Always learning and reading more though. Your article is perfect for anyone thinking they can get rich quick using real estate and other people’s money. You got to put in the time and effort to learn as much as you can before you just go for it. Thanks for the article.

David – Wow. Everyone needs to read this. I’m in the middle of a renovation of a duplex unit from a house hack I closed on – and guess what? Unexpected expenses came up! Good thing I had enough in reserves.

You actually gave people the “secret” to succeeding at this – Learn, train, work hard = SUCCESS! This is a contact sport and if you aren’t prepared to get hit every once in awhile, one of those hits will likely knock you out.

Thank you Tim. One thing people should think about-most of the “deals” we get come from distressed sellers in some form or another. The best investors are better at finding these distressed sellers. The one thing almost all distressed sellers have in common is they have run out of money. If you don’t want to be a distressed seller, make sure you won’t run out of money.

David,
If I ever meet you I intend to buy you a beer. You nailed this article. it is one of the top ten I have probably ever read. Thank you for taking the time to write this. I think it will help a lot of folks starting out. I have been investing in a lackadaisical fashion for over 20 years, and seriously for only 3 years. This information is so on point. Thank you again.

Love your analogy that investing with no money and bad credit is like entering a cage fight being out of shape and with no training! Such a vivid picture where no person in their right mind would enter such a fight because the outcome is obvious. Though I think in the real estate world, those who jumped right into investing with no money down and managed to succeed against the odds are proud to share such stories. Who can blame them, they are amazing. The problem though is that such stories may encourage newbie investors into believing that they too can take that same risk by investing before they’re really credit worthy or have their finances in order, and still come out whole against the odds. Yes it’s possible, but the odds are stacked against them as your post describes so well. Thank you for this excellent and very practical advice!

Thank YOU very much OB. I agree with you wholeheartedly. As I mentioned, I believe people should take advantage of what opportunities come their way. If you have no money or bad credit and great deal comes your way, find a way to make it work. But by no means should you just hope for great deals instead of preparing for them. Thank you for passing along the positive message for long term success!

Real estate is the get rick slow scheme, and part of that is saving enough money to get started without being forced to rely on low money down methods (instead of using them as only part of your arsenal). Live below your means, folks, otherwise, your means will never be very much.

Thank you for this article! I have been preparing for months getting the knowledge, money, and my credit in order (let me tell ya: a simple refi can expose your weaknesses in those important areas!!).
As with any post, I make sure to read feedback to find opposing views. EVERYTHING you wrote is irrefutable! Your advice is elementary and a necessary course on building a solid foundation. Thank you again!

David – wow, amazing. As a school teacher – my students roll their eyes at my constant analogy use – so this post really resonated with me!
The reality is that if you can’t sustain a financial hit you’re opening yourself up to unnecessary risk. After over 10 years of investing – I feel good about being able to actively pursue more buildings even with the potential for a CAPEX hit.
Great , great article.

Your students are lucky to have such a passionate teacher! As a rule in my own investing, I make sure I have plenty of money coming in through other means to cover any unexpected expenses. I’ve always done this. I’ve literally never worried even once what I would do if something went wrong. It sounds discouraging to say, but I think more people should approach things this way. Like Andrew Syrios says, real estate investing is a good rich slow plan. Half of wealth building is managing your own money, the other half is investing that money.

Hi David – yes, that’s a great point – it really is a get rich, slow plan. What I love about it is that although you must be organized and willing to work for it, you can also work a full-time job if you so choose to help with that extra source of income to both fund deals and cover potential costs.
Wealth mgmt is certainly all about investing the money – and understanding that there are areas where returns can be me far higher if you’re willing to become educated about them – i.e. real estate (and the myriad of ways you can invest in it).

Great article David! This analogy could apply to most things in life. Since you like analogies, and I agree they are a great way to make your point, another applicable analogy is the Field Training Process. As a fellow Officer and F.T.O. I couldn’t imagine turning recruits straight to the street swith no Academy, or field training. Real estate investing is similar in that you have to have a good knowledge base to draw from to make informed decisions. As well be mature enough to know when you need better preparation. Again, great article, I appreciate your vantage point.

David Green! Your “The Man”. I have to admit, I am the one your writing to and I know, I’m the only one on BP, with visions of sugar plum dancing in our heads. while, picking the low-hanging fruit, just waiting for us. But, reading your article was a like a bucket of ice water hitting me in the face. What a wake up call! I have now bookmarked this for future reminders of not racing ahead of my abilities,before better managing my affairs. Thank you for telling me to to slow my roll. Ha ha ha.

I am so glad to hear you got something from this and may have prevented some mistakes. Just remember, even if you’re not buying, you should always be learning. Make connections, sharpen your skills, put yourself in a situation to succeed, and when the time is right, strike with a vengeance!

Great article David. Those same “no money, bad credit, no knowledge” how-to posts constantly make me cringe and honestly a little upset at the “spoon-feed me success” mentality. Success takes hard work, time, and energy. I would take your analogy even one step further. Getting out there, finding the deals, etc. is all about your offense. Everyone on BP is building their offense. It feels like few are building their defense. They are great fighting as long as the opponent never lands a hit.

Great article David. It’s great to see straight forward article like this written. So many articles make real estate investing seam simple with very with little risk involved. Does anyone have any rules of thumb for how much savings is needed for a given amount invested? Thank you.

Banks will usually ask for 6 months reserves for each property. I usually throw a couple thousand on that to pay for repairs. Once you get a stabilized unit, it’s much easier to predict when you’ll need to fix what.

Hi David – I’m new to BP and new to investing. I’m currently in the deep research stage. I have great credit, etc. but still being cautious. Tough to resist the pull of what looks like a great deal, but i’m confident I’ll know when to take the leap. Thanks for your excellent post!

David,
Thanks for your article. I absolutely agree with your premise and frankly I think the whole “no money down” real estate movement has done a dis-service to the broader community as it isn’t very realistic nine times out of ten (or greater).

Perhaps part two of your article should be “how to get your financial house in order.” It will never cease to amaze me that people really don’t know their asset value nor do they understand budgeting and where they spend their money (Mindy’s article touched on part of that). I found that when I started doing balance sheets and updated them regularly (for a while I was doing it monthly) it became much easier to understand if I was going in the right direction or not. The balance sheets also allowed me to set goals and a strategy for how to get there.

Part three could be understanding the market. I run into folks who see a house/duplex/fourplex for sale and their first reaction is excitement over the price. Often times if a property is priced below the market there is a reason. Yes the reason could be a stressed seller but as often as not the price is low because of a deficiency in the property and oftentimes that deficiency is location. If you don’t learn the market and where to look and where not to the financial house you just put into order is going to rapidly tilt back out most likely (if you purchase in the wrong location).

I’ve learned the importance of the above because my first rental property was purchased in a market I did not understand, I was under capitalized, and I didn’t have a plan. For a while, this purchase, which was intended to create additional revenue, actually caused me to dig deeper into empty pockets to keep it afloat. I dug out of that but only because after my 50 hour work week in my real job I’d put another 30-40 hours/week (evenings and weekends) into maintenance and rehab of this property (was 13 units which I remodeled down to 7) over a two year period, all financed with a pile of credit cards. I still own that property, now almost 30 years later, but that first two-three years taught me an awful lot that I have since made sure not to repeat.

David this is my second encounter with your Words of Wisdom, the first was the hustle podcast.

You practice what you preached, you put in extra hours at work to SAVE.

I to have no money low credit, i feel i have come a long way in looking at my expenses and allocating my bi-weekly pay check accordingly. It’s tough to save, though that is not an excuse. The question, ‘how do i save money, and how do i fix my credit?” My answer is Real Estate Whole Selling.

I feel with Whole Selling i can build captiol, with the capital pay off debts and in turn build my credit back up.

It can be. But wholesaling isn’t easy. And it takes a specific personality and skill set to be good at that.

If it was up to me, I would want to take more in depth with you about what you’re good at, what you’re drawn to, and then think of ways we can get you to apply those skills to something to make you more money.

This post summarizes my mindset now. After a stormy few years I’m looking to rebuild my credit and live below my means to save backup funds before starting to invest. Of course I’m running through the treasure trove of BP articles, etc to learn as much as possible before that! Great and succinct post.

Wow terrific Article David! I always like your posts because they are always filled with golden nuggets! Scott Trench wrote an article about getting your financial house in order as well recently. I appreciate you guys giving the nitty gritty about Real Estate, as a lot of the time there can be a tremendous amount of pie in the sky stuff out there. Like you said we all desire freedom, but there is a right way to go about it. By the way the Fighting analogy was right on point!

This is an awesome article man! Something I’m going to take to heart. I’m not too far away from you, I’m here in Oakland CA.

I just bought my first duplex. Truth is I have a bit of debt, but I also have a bit of savings. By doing a lot of careful analysis before hand, I was actually able to reduce my monthly expense by buying this duplex.

I was paying ~$1,000/month for a room in Oakland. With the duplex, I’ll be dropping my monthly living expense to ~$400/month + repairs + utilities, tenants living there will pay the rest.

I’m excited because the next step for me is to wipe out student loans with the money I’ve freed up through buying.

It would be awesome to cross paths with you. Do you hit up any real estate meetups around the Eastbay, or Central Valley?

That was a great read. I’m definitely at a crossroads here simply because every success I have had was a result of my failures. From military, to civilian career, and now real estate. Before a I became good at I.T. I destroyed several machines. Definitely not one of those looking to invest with no money and bad credit. I’m not exactly where I want to be, however the first time I jumped out of an airplane I had no clue how the parachute would open. A few bumps and bruises but it an incredible experience. Thank you all and look forward to taking this jump.